Key takeaways:

• ETH falls to a 4-month low despite recent growth in Layer 2, which lowers base fees and increases Ethereum’s apply in tokenization and stablecoins.

• ETH may recover as global risks subside and up-to-date liquidity enters markets, helping the price return to $3,900.

Ether (ETH) fell below $3,000 on Monday, with the decline reflecting a shift in risk across the sector that has investors concerned that the bull market may have ended after a 40% correction from an all-time high of $4,956 in August.

Ether’s performance closely tracks the altcoin market, signaling a lack of asset-specific catalysts or at least a shift by traders towards broader macroeconomic factors. If Ether faced clear competitive pressure or weakening fundamentals, ETH would likely lag altcoins, which did not happen.

Analysts say the deterioration in the cryptocurrency market is due to growing concerns about global growth. The U.S. government shutdown and up-to-date import tariffs were followed by faint consumer sector profits and doubts about the artificial intelligence industry. Data centers currently face higher costs and energy constraints, even though their operations remain highly profitable.

Demand for bullish ETH leverage remains still for the month, with the futures premium remaining below the neutral 5% level. Some of this volatility is due to how market stress is affecting companies building ETH reserves, including Bitmine Immersion (BMNR US), SharpLink Gaming (SBET US), and The Ether Machine (ETHM US).

These companies have focused on ETH reserves through debt and equity issuances, and are currently suffering unrealized losses as their shares trade below their net asset value, which includes cryptocurrency holdings. Even if no forced sale occurs, investor interest in the sector will decline, reducing demand for up-to-date debt and gradually diluting existing bondholders.

Falling Ethereum onchain activity has dampened bullish appetite

Impoverished onchain data for Ether also hurt investor bullish appetite. Lower network activity reduces demand for ETH and increases supply. Ethereum’s combustion mechanism only becomes vital when data demand increases in the base layer, so slower DApp usage has a negative impact on ETH staking.

Deposits on the Ethereum network, as measured by Total Value Locked (TVL), fell to a four-month low of $74 billion, down 13% from 30 days earlier. Activity on decentralized Ethereum exchanges (DEX) has reached $17.4 billion over the past seven days, down 27% from the previous month. Ethereum remains the clear leader in deposits, but faces stiffer competition in terms of trading volume.

Critics may argue that BNB Chain and Solana are more centralized, with Ethereum leading when considering the Layer 2 ecosystem. Scaling solutions such as Base, Arbitrum, and Polygon have significantly improved Ethereum’s capacity, but have also raised concerns about fees. Because rollups group and process transactions outside the core layer, they significantly reduce the need for fees at the core layer.

Related: Republic raises $100 million for ETH purchases in unusual zero-interest deal

Nevertheless, the transfer of activity towards layer 2 does not pose a threat. The development of Ethereum’s scalable ecosystem has strengthened its leadership in Real World Asset (RWA) tokenization and in decentralized stablecoin systems such as Sky, formerly known as MakerDAO. The database itself has processed almost 102 million transactions in the last seven days, a number comparable to networks with much larger numbers of users and deposits, such as Solana.

Ether’s prospects depend largely on lower global socio-political uncertainty, especially as the United States faces pressure from rising public debt. Ultimately, central banks will likely need to raise liquidity and support their economies, and ETH is well-positioned to benefit from this inflow. This change could be enough for Ether to retest the $3,900 level.

This article is for general information purposes and is not and should not be treated as legal or investment advice. The views, thoughts and opinions expressed here are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.